Friends shareholders hold the key for Cowdery

Clive Cowdery will soon find out who his friends are.

By George Hay, breakingviews.com

2:51PM BST 13 Jul 2009

The insurance entrepreneur has been knocked back by the board of Friends Provident, the UK life insurer. It has rejected a takeover offer from Cowdery’s newly-capitalised acquisition vehicle, Resolution. But Friends’ shareholders may prove friendlier.

Cowdery has already received the surest sign of financial amity from many of Friends’ large institutional shareholders – including Aviva, Standard Life and Scottish Widows. They helped Cowdery raise £600m, the first stage in a plan to create an £11bn empire at Resolution. They were impressed by the 28pc annual return generated by Cowdery’s last insurance investment vehicle, also called Resolution.

Friends – with a market capitalisation of £1.4bn – is a big first step on a similarly lucrative journey. True, Cowdery is eying as many as a dozen possible targets – including Lloyds Banking Group’s Clerical & Medical. And he only wants to try his technique – restructuring for resale at a much higher price – on a handful.

But Friends does look vulnerable. The insurer's own restructuring programme got off to a weak start. It could only offload 53pc of F&C Asset Management though a demerger, rather than the planned outright sale. And business is bad, thanks to a large exposure to the deteriorating UK market. Revenues in the first quarter were 40pc lower in 2009 than in 2008. New business is dwindling.

The company’s return on embedded value in 2010 is expected to be much lower than the peer group: 11pc against 18pc, according to analyst KBW. The share price reflects the gap. Friends’ shareholders might welcome a fresh approach.

Resolution is a Cowdery-friendly vehicle. His Guernsey-based management company collects 10pcfr of the value generated by the operating company. And Cowdery doesn’t sit on the Resolution board, despite controlling the operating company.

Friends’ shareholders have to decide whether they want that much Cowdery power. But the entrepreneur doesn’t look desperate. He has offered only a meagre premium and an all-share deal. He is well aware that for shareholders with interests in both companies, a lower premium on Friends could turn into a higher gain on Resolution.